Selling online or flipping goods might feel like a hobby or side hustle.
But HMRC uses a set of tests to judge whether what you are doing counts as trading for tax purposes.
This can have big consequences on how much tax you pay, and how you report it to HMRC.
By understanding the badges of trade, you can avoid unwelcome surprises from the taxman.
(Read Time: Approx. 5 minutes)
Topics Discussed:
- What the badges of trade mean for your online selling and side hustles
- How HMRC determines if your activity is a trade, or just an investment
What Are the Badges of Trade
HMRC has nine badges of trade that it and the courts use to decide whether an activity counts as trading.
These are not rigid tests that must all be met, but rather factors that together show whether buying and selling activity looks like a business, or something more casual.
HMRC and the courts look at all of them to assess the overall picture.
1. Intent to Make a Profit
One of the primary badges examines why you bought an asset.
If you bought something with the intention of reselling it for a profit, then this suggests trading.
Profit motive on its own is not always enough to conclude that a trade exists, but it carries weight when combined with other badges.
For example, shares bought and sold for profit may still be treated as investments rather than trade because of their nature.
2. Number and Frequency of Transactions
HMRC looks at how often you buy and sell.
A large number of sales at regular intervals could indicate a business rather than one-off sales.
Simply selling something once or twice is less likely to be trading, but repeated operations that show a pattern raise questions.
This applies whether you sell through online marketplaces (such as Vinted or eBay), or otherwise.
3. Nature of the Asset
The type of asset you are selling matters.
Some higher-value assets, such as paintings held for personal enjoyment, or long-term investments, are more typically associated with capital gains rather than trading.
But goods that are generally bought for resale, like retail stock or commodities, are more likely to be classed as trading stock.
4. Connection With Other Trading Activities
If the sales are linked to an existing trade or business activity you already run, HMRC may see new sales as part of that trade.
For example, a mechanic selling parts regularly might be viewed differently to someone selling a car they no longer need.
This badge looks at how your activity aligns with what you already do.
5. Changes Made to the Asset
Modifying or improving an item before sale is a strong pointer towards trading.
This includes repair work, refurbishment, upcycling or repackaging goods, so they can command a higher price.
Activities such as refurbishing furniture and reselling it often fall within this badge.
6. How the Sale Is Carried Out
The method you use to sell your goods can suggest trading if it mirrors business practices.
Examples include advertising your goods, using agents, paying commission, or having a dedicated sales account.
Sales that look organised and structured strengthen the case for trading.
7. Source of Finance
If you borrow money specifically to acquire goods to sell, and the plan is to repay that borrowing from the sale proceeds, this points towards trading.
Financing arrangements tied to a buying and selling pattern look more like business behaviour and less like casual sales.
8. Interval Between Purchase and Sale
Holding assets for a short period before selling them supports the idea that you intend to trade them, rather than invest for long-term gain.
If you bought something today, and aimed to sell it as soon as possible, that turnover pattern supports trading.
Conversely, holding an asset indefinitely may support the case that it is an investment.
9. Method of Acquisition
How you came by the asset can make a difference.
Items acquired by inheritance or as a gift are less likely to be classed as trading stock.
However, if you purposely buy goods to sell them on at a profit, then that behaviour is more likely to be treated as a trade.
Income Tax or Capital Gains Tax
Capital Gains Tax generally applies to personal investments, with rates that are typically lower and with a £3,000 annual exemption.
Income Tax, however, kicks in with far less leniency.
If HMRC determines your activity counts as trading, then your profits will be taxed at your marginal income tax rate, alongside wages or other earnings.
Many believe that earning a few hundred or even a few thousand pounds isn’t a concern.
But if HMRC finds that even one badge applies, you may be required to file a tax return and pay tax.
Ignoring this could lead to penalties and interest far exceeding the original tax bill.
What You Need to Do
If you’ve sold anything online in the past year and suspect it might fall under one of the badges of trade, it’s essential to act.
Start by checking whether you’ve registered for Self-Assessment.
If not, apply for a UTR (Unique Taxpayer Reference) number without delay.
Once you receive it, complete your tax return and declare all relevant income.
Do not wait for HMRC to reach out first.
They already have data-sharing agreements with platforms like eBay, Amazon, and more.
Summary
The badges of trade are a powerful tool HMRC uses to identify undeclared business activity.
Even if your sales feel casual, your actions might tell a different story.
Just one badge may be enough to tip your activity into the realm of taxable trade.
If you think your situation fits the profile or even comes close, get in touch with us at Tax Expert.
We’ll help you evaluate your circumstances, understand your obligations and submit the correct information to HMRC before any issues arise.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
